HireQuest, Inc. — 2019 Form 10-K
Reporting period: Year ended December 31, 2019; includes unaudited fourth-quarter results. The filing was signed March 30, 2020. HireQuest is a temporary-staffing franchisor focused on light industrial and blue-collar labor. The July 15, 2019 merger with Command Center was accounted for as a reverse acquisition, with Legacy HQ as accounting acquirer; acquired company-owned offices were subsequently converted to franchises or sold.
Financial performance and condition
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $15.88 million | $12.33 million |
| Operating income | $2.78 million | $6.91 million |
| Income from continuing operations | Loss of $0.51 million | Income of $7.06 million |
| Net income | Loss of $0.29 million | Income of $7.12 million |
| Net cash from operating activities | $4.96 million, including $9.99 million from discontinued operations; continuing operations used $5.03 million | $5.07 million |
- Revenue increased 28.8% year over year. Franchise royalties were $14.67 million, up 30.0%; service revenue was $1.20 million, up 15.4%.
- Operating margin was approximately 17.5%, versus 56.1% in 2018; net margin was approximately negative 1.8%, versus 57.6%. Comparability is limited by the merger, office conversions and sales, and unusual tax and transaction costs.
- System-wide sales, a non-GAAP measure, rose 27.2% to $241.62 million, including $227.69 million from franchise offices and $13.93 million from company-owned offices. The company reported 147 franchised offices at year-end, up from 97.
- At year-end, cash was $4.19 million, accounts receivable $28.20 million, and notes receivable $11.41 million. Current assets exceeded current liabilities by approximately $26.0 million.
- The company reported no debt outstanding at December 31, 2019. Its $30 million revolving facility had $19.2 million available after $9.8 million of workers’ compensation letters of credit and a $1 million paycard letter of credit. The facility is secured by substantially all operating assets and includes covenants.
Fourth-quarter results
Unaudited fourth-quarter revenue was $5.87 million, up from $3.54 million in fourth-quarter 2018. Net income was $3.46 million versus $2.19 million; this included a $1.40 million income-tax benefit in 2019. Continuing-operations income was $3.78 million, while discontinued operations recorded a $0.32 million loss. The quarter’s results should be considered alongside the full-year merger and tax effects.
Material changes and unusual items
- SG&A increased 138.4% to $12.69 million. Nearly 70% of the increase was attributed to merger-related costs, including professional fees, non-recurring compensation, reorganization and rebranding costs, and costs associated with terminating Command Center’s headquarters lease.
- The company recorded a $3.48 million income-tax provision, primarily reflecting a one-time merger-related tax charge. Legacy HQ changed from partnership/S-corporation and cash-basis tax treatment to corporate and accrual-basis treatment.
- Following the merger, company-owned offices were converted to franchises or sold. Sales of converted offices included promissory notes; outstanding notes receivable reached $11.41 million, bearing fixed interest rates generally between 6% and 10%. No allowance for note losses was recorded.
- In the fourth quarter, the company revised its 2018 balance sheet for a cumulative $1.81 million understatement of amounts due to franchisees, with a corresponding reduction in retained earnings. Management said the revision did not materially affect prior-year income or cash flows.
- Management identified a material weakness in controls over the “due to franchisees” account; disclosure controls and internal control over financial reporting were deemed ineffective at year-end. Remediation included additional accounting staff and reconciliation, oversight, and review procedures.
Outlook, risks and contingencies
- The filing provides no quantified earnings or revenue guidance. Management cited franchise-office growth, system-wide sales, national accounts, and brand awareness as growth opportunities, while noting that the outlook had become uncertain.
- COVID-19 was identified as a significant emerging risk after year-end. The company reported early adverse effects, particularly reduced hospitality, event-service, and catering activity, and warned of possible office closures, franchisee distress, labor shortages, lower sales, and liquidity impacts. The duration and financial effect could not be estimated.
- Key ongoing risks include economic cyclicality and seasonality; dependence on franchisee performance and customer retention; temporary-worker availability; workers’ compensation costs, claims and collateral requirements; employment and franchise regulation; merger integration; technology and cybersecurity; and compliance with credit-facility covenants.
- Workers’ compensation claims liabilities totaled $3.84 million at year-end. The company is effectively self-insured up to policy deductibles and had provided approximately $9.8 million in letters of credit as collateral.
- Related-party relationships include shared ownership with certain franchisees and service providers. Worlds Franchisees operated 57 of 147 offices and generated $6.96 million of 2019 royalties. Investors should review the disclosed related-party transactions and governance implications.
- The company stated that pending legal and administrative matters were not expected to result in material uninsured losses. It pays no cash dividend.
Most important facts for investors to verify
- Whether the internal-control material weakness has been fully remediated, and whether subsequent filings report any further errors or revisions.
- How much of the $11.41 million notes receivable is being collected on schedule, especially financing tied to newly converted franchise offices.
- Actual COVID-19 effects on system-wide sales, royalties, office counts, franchisee solvency, staffing demand, and liquidity.
- Workers’ compensation claims development, collateral demands, and compliance with the credit facility’s financial covenants.
- The sustainability of reported earnings, separating recurring franchise economics from merger costs, discontinued operations, and unusual tax benefits or charges.